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ARRA Internal Control

ARRA Internal Control. Colorado State Controller David J. McDermott. The Essence of Internal Control. Should I print up $787 billion of money we don’t have and dump it into the economy? Should I process this ARRA funded reimbursement request for $87.50 for my Exec Director’s lunch?.

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ARRA Internal Control

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  1. ARRA Internal Control Colorado State Controller David J. McDermott

  2. The Essence of Internal Control • Should I print up $787 billion of money we don’t have and dump it into the economy? • Should I process this ARRA funded reimbursement request for $87.50 for my Exec Director’s lunch?

  3. The President’s Answer to #1 • March 20, 2009, Presidents Memo to Federal agencies: • “…I signed into law the American Recovery Investment Act, an investment package designed to provide a necessary boost to our economy in these difficult times and to create jobs, restore economic growth, and strengthen America’s middle class. The Recovery Act is designed to stimulate the economy through measures that, among other things, modernize the Nation’s infrastructure, jump start American energy independence, expand high-quality educational opportunities, preserve and improve access to affordable health care, provide middle-class tax relief, and protect those in greatest need. It is not intended to fund projects for special interests. “

  4. My Intuitive Answer to #2 • If you touch the money you are accountable for how it gets expended. • Don’t rationalize • Don’t be self-serving • Avoid conflicts of interest • Hold each other accountable • Know the requirements and follow them

  5. The Internal Control Challenge • Developing and operationalizing a sustainable system to ensure that informed ethical decisions in support of organizational goals are made at all levels of your entity.

  6. How We Got Here Trading Population and Productivity Time

  7. How We Got Here Trading Population + Productivity + Lending Time

  8. How We Got Here A “Perfect” Business Cycle Trading Population + Productivity + Lending Time

  9. How We Got Here An “Aberant” Business Cycle Trading Population + Productivity + Lending OUCH! Time

  10. How We Got Here Trading Monetary Policy Managed Business Cycle Population + Productivity + Lending Time

  11. How We Got Here Trading Tax, Fiscal, and Monetary Policy Managed Business Cycle Population + Productivity + Lending Time

  12. How We Got Here Trading Tax, Fiscal, Monetary Policy with Derivative Speculation Population + Productivity + Lending Time

  13. How We Got Here Trading Tax, Fiscal, Monetary Policy with Derivative Speculation Population + Productivity + Lending You are Here ARRA Time

  14. Declining Impact of Monetary Policy M1 = notes, coins, travelers checks, demand deposits, credit union share drafts, other checkable deposits.

  15. Is the Market Right?

  16. Who Are the Players • Congress • President • Office of Management and Budget (OMB) • Danny Werfel, Controller • Recovery Accountability and Transparency Board (RATB) • Earl Devaney, Chair • Federal Agencies • National Recipient Organizations (NGA, NASACT, NASBO, NASCIO, NASPO, NACO, and other national associations)

  17. What & Where Are the Requirements?(Your #1 IC problem) • The Act (410) • OMB February 18 Memo M-09-10 (62) • President’s March 20 memo to Federal Agencies(5) • OMB April 3 Memo M-09-15 (172) • Compliance Supplements (March, June Addendum - 301) • OMB A-133 Pilot • Web link: • http://whitehouse.gov/omb/recovery_default • Your existing internal controls (?)

  18. The Act • Title XV • § 1511 – Funds for infrastructure investment require Governor or CE certification • § 1512 – Reports on use of funds • 10 data elements (including jobs count) plus FFATA (Fed Fndng Acct & Transp Act) requirements • Reporting is a “condition of receipt of the funds” • CCR registration • Additional guidance by Federal agencies and OMB

  19. The Act • Title XV • §1513 – Reporting on jobs, growth, and economic indicators by the Council of Economic Advisors • §1514 - Inspector General review and access • §1521 - RATBoard creation and powers, audit and review, website,coordination with OSA, “appropriated such sums as necessary” • §1541 - RIAP (President’s Recovery Independent Advisory Panel)

  20. The Act • Title XV • §1551 – Separate Treasury Accounts • §1552 – Fed agencies authorized to adjust admin cost limits • §1553 – Whistleblower protection (5 pages)

  21. The Act • Title XVI • §1601 – Funds are additional appropriations not subject to other legal limits • §1602 – Infrastructure – 50% w/i 120 days; grants to maximize jobs & economic benefit • §1603 – Funds available for “obligation” till 9/30/2010 unless expressly specified • §1604 – No casinos, aquariums, zoos, golf courses or swimming pools

  22. The Act • Title XVI • §1605 – Buy American - Iron, Steel, and Manufactured Goods unless: • Contrary to public interest • Unavailable • Cost increases > 25% • Subject to waiver • Subject to international agreement

  23. The Act • Title XVI • §1606 – Prevailing wage for Contractors and subs payments to laborers and mechanics • §1607 – Use of Funds • Certification by Governor to request and use funds for job creation and economic growth • State Legislature can accept by concurrent resolution in lieu of the Governor • §1608 – Contracting preference for “individuals with disabilities” • §1609 – NEPA (National Environmental Policy Act) reviews required, but must use the “shortest existing applicable process”

  24. The Act • Title XVI • §1610 – All Federal contracting must comply with Federal Acquisition Regulation (FAR) • §1611 – Unlawful for companies receiving TARP funds to hire nonimmigrants (as defined in the Immigration and Nationality Act) • §1612 – Appropriation transfers by Federal agency heads for like purposes allowed up to one percent

  25. OMB Memo M-09-10 (February 18) • Specifically directed to Federal agencies • Question and answer format • Limited applicability to recipients, but provides insight into why • the reporting elements exist • Federal agencies have special requirements • Federal agencies required to do Risk and Internal Control assessments • A-102 (Common Rule as adopted by each Federal agency), A-110 (Higher Ed Institutions), and A-133 (Single Audit Act Implementing Guidance) all apply • Required ARRA update to Compliance Supplement

  26. OMB Memo M-09-10 (February 18) • Established formula and competitive grant requirements: • Use Federal agencies standard award terms and conditions • Award must make receipt of funds contingent on §1512 reporting compliance • Recipients and subrecipients required to complete DUNS and CCR registrations • Revise terms and conditions to meet ARRA specific requirements

  27. OMB Memo M-09-10 (February 18) • Established formula and competitive grant requirements: • Inform recipients that ARRA dollars are one time funding • Requires recipients and subrecipients to notify promptly an Inspector General of any credible evidence that a principal, employee, agent, contractor, subgrantee, subcontractor or other person has submitted a false claim or committed criminal or civil fraud, conflict of interest, bribery, gratuity, or similar misconduct

  28. President’s March 20 Memo • Merit based awarding of Federal Financial Assistance to projects that maximize; • Delivery of programmatic results • Achieve economic stimulus • Provide long-term public benefit • Satisfy accountability and transparency objectives • Avoidance of imprudent projects • Required public posting of all registered lobbyist communications • Directed OMB to provide guidance

  29. OMB Memo M-09-15 (April 3) • Expanded on M-09-10 guidance – in question answer format • Highlights of Section 3 – Governance, Risk Management, and Program Integrity • Recovery Act Accountability Framework and Objectives (following slide)

  30. OMB Memo M-09-15 (April 3) • Highlights of Section 3 • Risk Identification • High dollars • Measurable outputs and outcomes • Sufficiency of provided resources • Attributes of the final recipient (contractor, subcontractor, state, local, HEI) • Recipient history • New versus existing program administration

  31. OMB Memo M-09-15 (April 3) • Highlights of Section 3 • Risk Identification • History of cost and schedule compliance • Current audit findings • Existing internal controls adequate to identify and mitigate waste, fraud, and abuse. • Known performance issues with recipients, subrecipients, or contractors

  32. OMB Memo M-09-15 (April 3) • Highlights of Section 3 • Risk Mitigation Actions • Use existing grant structures to accelerate spend out • Aggressively promoted DUNS and CCR registration • Weight selection criteria to applicants able to deliver timely and accountable program results

  33. OMB Memo M-09-15 (April 3) • Highlights of Section 3 • Risk Mitigation Actions • Performance evaluations to include reporting timeliness and accuracy • Validate payment and reporting accuracy using statistical or risk based methods • Use fixed-price contracts whenever possible

  34. OMB Memo M-09-15 (April 3) • Highlights of Section 3 • Risk Mitigation Actions • Employ compensating controls for other than fixed-price contracts • Promote competitive procurement policies • Require higher-level signoff for noncompete procurements

  35. OMB Memo M-09-15 (April 3) • Highlights of Section 3 • Risk Mitigation Actions • Make receipt of funds contingent on 1512 reporting compliance • Increase oversight assignments where risks are identified • Use Appendix C of A-123 to assist in identifying, measuring, and recovering improper payments. • Verify payments against the Excluded Parties List (www.epls.gov)

  36. OMB Memo M-09-15 (April 3) • Highlights of Section 3 • Risk Mitigation Actions • Structure grants and acquisitions to meet meaningful and measurable outcomes through evaluation criteria • Minimize contractor & grantor need for credit financing using deliverables, milestones, or percent-of-completion invoicing

  37. OMB Memo M-09-15 (April 3) • Highlights of Section 3 • Risk Mitigation Actions • Evaluate workforce needs to manage grant/contract considering ARRA complexity • Identify mission-critical human capital needs and perform gap assessment • Identify program-specific risks and address

  38. A-133 Compliance Supplement • Original CS - March 2009 Compliance Supplement Appendix VII (4 pages) is at: • http://www.whitehouse.gov/omb/assets/a133_compliance/app_7.pdf • June 2009 Addendum (301 pages) is at: • http://www.whitehouse.gov/omb/assets/a133_compliance/arra_addendum_1.pdf

  39. A-133 Compliance Supplement Appendix VII • Original CS provided little guidance except: • Promised addenda to specifically address ARRA • Significant risk in failure to identify the award as ARRA • All ARRA expenditures (not awards) are high risk by default, and low risk only by specific justification

  40. A-133 Compliance Supplement Appendix VII • Original CS provided little guidance except: • Each ARRA award must be in a separate a line on the Schedule of Expenditures of Federal Awards (SEFA) and the Data Collection Form (SF-SAC) • Applies to both recipients and subrecipients • Recipients and Subrecipients must notify their subgrantees of this requirement

  41. A-133 Compliance Supplement June Addendum • Requirements spread through out • ARRA affected text is bolded in the index and text • Program and grant accounting staff should be familiar with the grant specific compliance requirements and how your auditor will test that compliance • Part 6 addresses Internal Controls • Intended to assist only • Not a checklist • Not prescriptive

  42. A-133 Compliance Supplement June Addendum – Part 6 • Internal Control Objectives • Transactions properly recorded and accounted for • Support financial statement preparation and Federal reporting • Accountability over assets • Demonstrate compliance with laws, regulations, and other compliance requirements

  43. A-133 Compliance Supplement June Addendum – Part 6 • Internal Control Objectives • Transactions executed in compliance with • Laws, regulations, and contract/grant provisions that could have a direct and material effect on the Federal program • Any other laws and regulations identified in the Compliance Supplement

  44. A-133 Compliance Supplement June Addendum – Part 6 • Internal Control Objectives • Funds, property and other assets are safeguarded against: • Loss • Unauthorized use • Unauthorized disposition

  45. A-133 Compliance Supplement June Addendum – Part 6 • Assumes the COSO Framework • Includes COSOs most recent addition – increased focus on monitoring IC • SAS 78 – Consideration of Internal Controls in a Financial Statement Audit • AICPA’s SAS 78 Related Audit Guide

  46. A-133 Compliance Supplement June Addendum – Part 6 • COSO’s 5 Internal Control Components • Control Environment • Risk Assessment • Control Activities • Information & Communication • Monitoring

  47. A-133 Compliance Supplement June Addendum – Part 6 • Control environment • Ethical environment, code of conduct • Audit committee or equivalent • Findings responsiveness • Management respect for compliance rqmts. • Clearly define responsibilities • Management knowledge & experience • Staff knowledge of and responsibility to report noncompliance • Adequate training at all levels • Management support for adequate information and reporting systems

  48. A-133 Compliance Supplement June Addendum – Part 6 • Risk Assessment • Program managers/staff identify/understand key compliance objectives • Org structure supports risk identification • Key managers responsible for change notification • Inexperienced staff identified and closely supervised • Complex programs/operations identified & addressed • Management active in IC monitoring, audit/review follow up • Processes in place to effectively implement program changes

  49. A-133 Compliance Supplement June Addendum – Part 6 • Control Activities • Clearly written & communicated operating policies • Viable procedures for implementing law, regulation, guidance, & funding changes • Management prohibition against control override • Segregation of duties for task performance, review, and record keeping • Computer & program controls include: data entry/edit checks, exception reporting, access controls, review of input/output, & general/security controls

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